Feds issue warning about two Chinese firms with Bay Area branches

House Intelligence Committee Chairman Rep. Mike Rogers, R-Mich., left, and the committee's ranking Democrat, Rep. C.A. "Dutch" Ruppersberger, D-Md., take part in a news conference on Capitol Hill in Washington, Monday, Oct. 8, 2012, to release a report on a yearlong probe of China's two leading technology firms, Huawei Technologies Ltd. and ZTE Corp., warning they pose a major security threat to the US. (AP Photo/J. Scott Applewhite)

Doing business with two Chinese telecommunications-equipment makers -- including one with a growing Silicon Valley office -- could pose a security threat to the U.S. because of the firms' apparent ties to the Chinese government, a Congressional report warned Monday.

"Based on available classified and unclassified information, Huawei and ZTE cannot be trusted to be free of foreign state influence and thus pose a security threat to the United States and to our systems," according to the report by the U.S. House Permanent Select Committee on Intelligence.

In an interview with this newspaper last year, Huawei officials said they had 430 employees and planned to hire 200 more at their Santa Clara research center, which develops information-technology software and equipment to integrate computing, networking and data storage.

Because China has been suspected of fostering cybersecurity breaches in this country, the report urged U.S. businesses and government agencies to "exclude ZTE or Huawei equipment in their systems."

The federal advisory could benefit San Jose-based Cisco Systems (CSCO) and Juniper Networks of Sunnyvale because they sell wireless networking equipment that competes somewhat with that from the Chinese firms, said Brian Marshall, an analyst with the International Strategy & Investment Group.

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"I think on the margin the U.S. guys would be positively impacted by this," he said, although he doubted Cisco's and Juniper's sales would be boosted significantly.

Officials with Juniper Network declined to comment and Cisco spokesman John Earnhardt said only that the report "clearly speaks for itself."

In a separate development, ZTE reportedly is being investigated by federal authorities over allegations that it violated a U.S. ban on selling Cisco's networking gear to Iran. Earnhardt said Monday that "Cisco has no current relationship with ZTE," which had been reselling Cisco products in a few countries.

Officials at ZTE, whose website lists a research and development branch in Milpitas, could not be reached for comment. However, a statement issued by Huawei vehemently protested the congressional report, saying the document "ignored our proven track record of network security in the United States and globally." Huawei also accused the lawmakers of obstructing Chinese companies from entering the U.S. market.

"Huawei is no different from any startup enterprises in Silicon Valley, and our growth and development relies very much on our entrepreneurial spirit, the commitment and hard work of our employees, as well as our unwavering dedication to innovation," the statement said.

In the interview last year, in which he denied a relationship with the Chinese government, John Roese, former head of Huawei's North American research arm, said the company was actively recruiting Silicon Valley engineers and programmers to help it challenge Cisco and other Western rivals. Roese left Huawei earlier this month to take a job with EMC.

A person from Huawei's local office who asked not to be identified said the company wasn't planning any changes in its U.S. operations as a result of the congressional report.

Huawei has been controversial for years.

In a 2003 lawsuit, Cisco accused the Chinese company's U.S. subsidiaries of copying the user interface, manuals and source code for Cisco's routers, which distribute data over corporate networks and the Internet. Huawei admitted that a small portion of its source code had been copied from Cisco and the two companies settled the dispute.

In addition, Huawei four years ago was forced to withdraw a bid to invest in 3Com, a networking company later acquired by Hewlett-Packard (HPQ), after U.S. officials said the deal could allow Chinese access to 3Com's technology. In addition, Huawei in 2011 backed away from a deal to buy the assets of 3Leaf Systems, a Silicon Valley cloud computing firm, after a federal panel again raised objections.

Contact Steve Johnson at 408-920-5043. Follow him at Twitter.com/steveatmercnews.